One of the pleasures of the evening (for me at least) was hearing Warren making a careful, line-by-line criticism of the book Where Does Money Come From?, published by the New Economics foundation. I’ve heard little but praise for that book, which I believe to contain a number of misleading statements. So it was reassuring to hear Warren taking issue with it.

Ralph asked Warren if he could write his criticisms up into a review of the book. Warren replied by asking why people were always trying to give him more work, which is fair enough! But I take Ralph’s point; it would be nice to have a written version of the criticisms to refer to. Thus I’m going to try to present, in my own words, the gist of a few of the comments I remember Warren making on the first two chapters of the book.

Please be aware that I’m going on nothing but memory here – I became too engrossed to take notes. I’ve listed the sections of the book Warren was criticising and quoted the relevant passages. The criticisms are, of course, in my own words.

I’m going to put this up and then invite others who were present at the event (including Warren) to correct me where they think my memory has failed, so please check back to see what has come up.

1.2.1 The money supply and how it is created

Defining money is surprisingly difficult.

So why bother defining it? You only end up getting into Scholastic disputes about whether credit cards, payslips, McDonalds vouchers count as money. Why not just say “cash” when you mean cash, “bank deposits” when you mean bank deposits, “Treasury bonds” when you mean Treasury bonds, etc.?

New money is principally created by commercial banks when they extend or create credit, either through making loans, including overdrafts, or buying existing assets.

This only follows from defining money in a particular way. So it doesn’t have the sort of operational significance the book gives it.

Physical cash accounts for less than 3 per cent of the total stock of circulating money in the economy. Commercial bank money – credit and coexistent deposits – makes up the remaining 97 per cent.

This completely leaves out Treasury bonds, which are also highly liquid and circulate widely. The reason is that Treasury bonds have not been included in the definition of “money”. But that, as above, is quite arbitrary. Including Treasury bonds in the money supply would in fact make a lot of the textbook quantity effects show up more clearly. [UPDATE – Warren adds: MOST IMPORTANT IS THAT TSY SECURITIES ARE NOTHING MORE THAN TIME DEPOSITS AT THE FEDERAL RESERVE BANK. THAT IS, FROM THE STANDPOINT OF THE DEPOSITOR, THEY ARE JUST BANK DEPOSITS- DOLLARS DEPOSITED IN A BANK. SO FOR ME THE BURDEN OF PROOF IS WHY THEY AREN’T ‘INCLUDED’ THE WAY OTHER BANK DEPOSITS ARE? AND WHEN YOU DO THAT, YOU SEE THAT QE, FOR EXAMPLE, DOES NOTHING TO ‘THE MONEY SUPPLY’ THAT INCLUDES THOSE TIME DEPOSITS AT THE FEDERAL RESERVE BANK.]

1.2.2 Popular misconceptions of banking

In fact the ability of banks to create new money…

Why not say “create deposits”? It would be much more precise.

…is only very weakly linked to the amount of reserves they hold at the central bank.

It isn’t limited by the reserves they hold at all.

…it is the commercial banks that determine the quantity of central bank reserves that the Bank of England must lend to them to be sure of keeping the system functioning.

It’s not a matter of “keeping the system functioning”. In the first instance a reserve requirement per se is an overdraft, so it’s not wrong to say loans create both deposits and reserves, as a matter of accounting, or something like that. In other words, “adding reserves” is never subsequent to lending, as a point of logic. [The words from the second sentence of this paragraph onwards were supplied to me by Warren and replace what I had there earlier.]

Keynesians and Austrians argue about whether the central bank should or shouldn’t supply required reserves to the banking system. This is all a red herring, since in fact the central bank can’t not lend the reserves.

Boom and bust cycles are just a fact of life under capitalism; you’ll have them regardless of what you do with the banking system. People will always find ways to go in when times are good and get out when times are bad. The point is to have the state mitigate the effects of the cycles, not to try to build a system that makes them impossible. [Warren adds: I’M IN FAVOR OF REMOVING THE INCENTIVES AND OTHER CAUSES OF MUCH OF WHAT’S HAPPENED, AS PER MY PROPOSALS FOR THE FED, THE FDIC, THE TSY, AND THE BANKING SYSTEM. AND IT’S ALL A WORK IN PROGRESS, OF COURSE. BUT NOT TO LOSE SIGHT OF THE RESPONSIBILITY OF THE STATE TO SUSTAIN AGGREGATE DEMAND WITH FISCAL ADJUSTMENTS. THE CURRENCY IS A PUBLIC MONOPOLY, THE STATE IS IN CONTROL OF THAT MONOPOLY, AND MONOPOLY IS WHAT IT IS- IT’S UP TO THE MONOPOLIST, NOT ‘MARKETS’. THE MONOPOLIST IS SOLELY RESPONSIBLE FOR FISCAL MANAGEMENT.]

Banks decide where to allocate credit in the economy.

No they don’t. All their loans can be investigated by the state, which has the power to tell them what loans they can and can’t make. As an analogy, an individual soldier can choose where to point his rifle, but this doesn’t mean that the military isn’t controlled by the state. Soldiers have their orders, and so do the banks. The regulators can make the orders as precise or as imprecise as they like.

Basically, banks are public-private partnerships, working in the public interest as determined by the state. If they don’t provide net social benefit, that’s the fault of the state for not setting their purposes properly. (Warren’s main idea for reforming bank regulation is to have the state tell banks what they are allowed to do, rather than, as currently, trying to tell them all the things they aren’t allowed to do – a hopeless task, which always leaves out something important.)

Fiscal policy does not in itself result in an expansion of the money supply.

Only because Treasury bonds have not been included in the definition of money! So this is a fact that follows from a mere definition and can’t have any operational significance. [At this point Warren looked at me to give a helpful philosophical explanation, which I was unable to do. I now propose Collingwood’s phrase: “trying to pull a concrete rabbit out of an abstract hat”.]

Also, if the Treasury didn’t sell bonds to drain reserves after it spent then fiscal policy would result in an expansion of the money supply as defined by the authors. In fact bonds are a relic of the gold standard (when an importance difference between them and reserves was that reserves were gold certificates and bonds were not). Today bonds are sold for the purpose of maintaining a higher-than-zero interest rate, but this could just as well be achieved by paying interest on reserves.

2.2. Popular perceptions of banking 1: the safe-deposit box

A poll conducted by ICM Research on behalf of the Cobden Centre found that 33 per cent of people were under the impression that a bank does not make use of the money in customers’ current accounts. When told the reality – that banks don’t just keep the money safe in the bank’s vault, but use it for other purposes – this group answered “This is wrong – I have not given them my permission to do so.”

Your deposit never leaves the bank’s balance sheet. The bank doesn’t debit or credit your account without your instruction, and so your money isn’t “used for other purposes” by the bank.

2.4 Three forms of money

While many assume that only the Bank of England has the right to create computer money, in actual fact this accounts for only a tiny fraction of the money supply. The majority of the money supply is electronic money created by commercial banks.

Commercial banks can create deposits, which are liabilities for the banks and assets for the depositors. This must all net to zero overall. Only the state can create net financial assets for the private sector.

Central bank reserves are used by banks for the settlement of interbank payments…

In the US most clearing is done by private clearing houses, because they are cheaper than the Fed for member banks. Only end of day net clearing is done at the Fed. [These words are from Warren, who adds: ideally the Fed would just allow member banks to have unlimited overdrafts and not charge a penalty rate, but just the policy rate, which would end the need for the interbank market.]

When banks do what is commonly, and somewhat incorrectly, called ‘lend money’ or ‘extend loans’, they simply credit the borrower’s deposit account, thus creating the illusion that the borrowers have made deposits.

Where is the illusion? The loan just creates a deposit for the borrower.

Bank deposits are not legal tender in the strict definition of the term…

Legal tender laws are only relevant when payments are demanded in the courtroom. They are of little significance anywhere else since people circulate all sorts of assets that aren’t legal tender (many countries have no legal tender laws and get by just fine).

The term ‘money supply’, usually refers to cash and bank deposits taken together…

Which is a purely stipulative definition and leaves out a lot that is operationally significant.

2.5 How banks create money by extending credit

…let us just consider whether it is really meaningful to describe the balance in your bank account as anything other than money. You can use it to pay for things, including your tax bill, and the Government even guarantees that you will not lose it if the bank gets into trouble.

So why not include Treasury bonds in the definition of “money”? Also, on this definition only deposits under the insured amount count as money.

The main constraint on UK commercial banks and building societies is the need to hold enough liquidity reserves and cash to meet their everyday demand for payments.

This is not a constraint at all, as explained above.

2.8 How money is actually created

…the authorities are not free of responsibility for results produced by the largely unchecked behaviour of the banking sector.

This is a massive understatement, since banks are public-private partnerships, as explained above.

Equally, while banks can create deposits for their customers, they cannot create central bank reserves.

But, again, required reserves are always automatically loaned to banks, though possibly at a punitive rate.

Therefore, they can still suffer a liquidity crisis if they run out of central bank reserves and other banks are unwilling to lend to them.

See above.

When a central bank chooses to adopt a laissez-faire policy concerning bank credit, as now in the UK, boom-bust credit cycles are likely to result, with all their implications for economic analysis and policy. This is obvious when we think about the link between credit creation and economic activity.

What matters in terms of business cycles is the solvency of debtors, not the quantity of credit. And, again, boom-bust cycles are a fact of life. You can’t stabilise the economy by fixing banking alone.

More generally, you can’t read public purpose off the monetary system. You need to decide on public purpose and then make whatever monetary system you have work for that purpose.

Footnote on MMT (in section 6.2)

The book contains a footnote on MMT, which Warren found to be inaccurate. The main passage reads:

If the Government cannot borrow money from the central bank or create its own money, how then does it ‘spend’? Governments must, like me and you, obtain money from somewhere before they can spend.

The footnote reads:

Modern Monetary Theory (MMT) is an approach in macro-economics which argues against this.

Warren pointed out that this is false. MMT agrees that if the government can’t issue its own currency / borrow from its own central bank (i.e., on a fixed exchange rate system), then it has to obtain currency before it can spend. But on a floating exchange rate system, the government spends by crediting reserve accounts and has no financial constraint. Bizarrely, the footnote goes on to say that:

MMT says that in nation states with fiat money, sovereign currencies and central banks … [t]here is no restriction on governments’ ability to spend by creating new money.

But a nation state with ‘fiat money’ is not in the condition specified above (“the Government cannot borrow money from the central bank or create its own money”).

So Warren concludes, as I do, that the authors seem not to understand MMT and to be confused about what it is actually proposing.

Indeed, there seems to be a general confusion surrounding concepts like money, debt, creation (of money), etc. Frank van Lerven of Positive Money agreed that most of the differences between MMT and Positive Money come down to conceptual or semantic distinctions. I think I remember that Laurie MacFarlane of the New Economics Foundation also agreed on this point.

What we need, therefore, is a philosophical investigation of the relevant concepts aimed at clarification and improving consistency.

” When a bank makes a loan, required reserves are automatically loaned by the central bank. Banks can then look to borrow reserves on the interbank market to settle the overdraft with the central bank, thus securing a more favourable interest rate.”

That’s not quite the case. When a bank makes a loan, the deposit is created *at the same bank*.

For that bank deposit to be transferred to another bank *that other bank has to become the creditor/depositor in the original bank* – otherwise the transfer cannot take place.

The central bank is, operationally, a clearing house between the banks for these transfer deposits so that the commercial banks can manage their risk profile effectively (and like all other clearing houses reduce their liquidity requirements via netting off).

So banks don’t really lend or borrow central bank reserves at all. They just lend to the other banks in the normal fashion and accounting for it via the central bank because it is convenient. If you eliminate the central bank you just have an OTC system between the banks rather than a centrally cleared system.

“Frank van Lerven of Positive Money agreed that most of the differences between MMT and Positive Money come down to conceptual or semantic distinctions. ”

The difference is the objection to the aristocratic political philosophy embedded in the idea. The idea that centralisation and dictation of money by ‘betters’ is superior to simply allowing representative democracy to decide what needs to happen and the banking system just serving that end (as the welfare system does).

The PM proposals are fundamentally centralist, authoritarian and regressive, not liberal. Hence the removal of free banking, credit interest, and the appalling idea that a bunch of unelected wonks should be able to tell the elected chamber what they can and can’t spend. In other words effectively reverse the Parliament Act and the actions of 1910.

“The great parliamentary battle of 1910-11 established that the Lords cannot override the Commons and, in particular, cannot gainsay the Lower House on matters of finance”

If the Lords can’t, then why should anybody else be able to?

The debate is on liberal principles, the limits of collectivism, and the drain of sovereignty to unelected quangos.

Neil objects to Positive Money’s ideas because he doesn’t like the idea that “unelected wonks should be able to tell the elected chamber what they can and can’t spend.” I suggest Neil studies PM’s ideas in more detail.

PM most certainly does not propose that the central bank should tell government how much public spending should be as a % of GDP. Nor does PM propose that CBs should tell government how much to spend on education, roads or anything else. Those are obviously political decisions, as PM makes clear.

What PM does propose is that CBs should be responsible for the size of the stimulus package over the next year or whatever. But that decision ALREADY RESTS with CBs in that an independent CB can use interest rate adjustments to counteract fiscal stimulus implemented by politicians. To that extent, Neil is not objecting specifically to PM: he is objecting to CB independence.

But even the latter power of CBs is not actually an essential ingredient of PM’s proposals. That is, if we reverted to a pre Gordon Brown style Bank of England, i.e. a non-independent BoE, the folk at PM wouldn’t turn a hair. That would have no effect on PM’s basic idea which is (as proposed by Milton Friedman, Laurence Kotlikoff and others) that private banks should not issue money: only the state should do that.

I can sort of see that. But what happens on the PM proposal if the central bank, independent or not, sets a limit and the Treasury makes payments exceeding it? Does it just refuse to clear the payments? If so, that’s a power it doesn’t currently have.

Central banks deciding the size of the stimulus package sounds very monetarist – i.e. that central banks should attempt to control the money supply by deciding how much extra is available. Or have I read this wrong?

Richard Werner et al did everybody an immense favour with “Where Does Money Come From?” Everybody in the heterodox community should all recognise and applaud him for this. Some of the criticisms above are semantic, others unfair. An example of the former, since a deposit is money, and most money is in the form of deposits, it is fair to say that commercial banks do create money. An example of the latter, given that the state does not in any way hinder or direct banks in their allocation of credit credit, then it is fair to say that the banks in fact do decide where to allocate credit.

Does Werner make mistakes? Sure, of course he does, and you’ve pointed out some very serious ones. I can only hope some sort of dialogue can be started with Werner and that he takes on board some of your suggestions. Another prime example is Werner’s insistence on crowding out (see his superb book “Princes of the Yen”), which is odd as he is an exponent of endogenous money.

Is the MMT analysis better than that Werner or anybody else provides? Yes, it is. In fact, it is the best analysis there is. Let us not forget, though, that the MMT community has not produced an introductory book to explain money and banking. Werner took the trouble to do so. He deserves a tremendous amount of respect for doing so. Where else can someone learn this stuff? Until Eric Tymoigne’s useful but very recent “Money and Banking” posts over at New Economic Perspectives, absolutely no one has taken the trouble to make this stuff intelligible. Wray’s so-called primer, for example, wasn’t particularly useful.

I for one could not follow anything Mitchell, Wray and any other MMTer said until I had read “Where Does Money Come From?” Fair enough, “WDMCF?” has now been superseded to some extent by Tymoigne’s excellent posts. But until Tymoigne and the rest of the MMT community can fashion an introductory book for non-economists, or indeed for novice economists, then Werner’s book is still the go to introductory book. If read in conjunction with the first section of Positive Money’s “Modernising Money” and Brian Romanchuk’s absurdly good eReport “Understanding Government Finance”, you’ll be in a good position to start reading the excruciating prose of the MMTers. Perhaps your book “Philosophy of Debt” fills this unfortunate gap. The strange thing is that it is quite obvious that Tymoigne and others teach courses on this material but have not taken the what appears to be little extra effort and trouble in putting their lecture notes together into a book! The world is going up in flames. The world desperately needs MMT’s policy recommendations. And still the MMTers provide little information to inform the public. When they do, it occasionally descends into farce and recrimination, as it did when Bill Mitchell gave a lecture in London.

To be honest, the MMT community, and indeed the wider PK community, have not made their work inviting. There was little introductory work available until recently. Perhaps this is to do with how the publishing industry operates – one which sees no way of covering its costs let alone making a profit with such unusual material. In any case, Werner’s little book is more useful than Wray’s primer. As I said elsewhere, reading Wray and Mitchell is like swimming through treacle. When you finally realise what in fact they mean, you’re left perplexed by their tortuous style of writing. They may be the equal of Minsky, but, like Minsky and Kalecki, if you can’t understand what they’re saying, who cares? Even Mitchell and Wray’s new introductory textbook is tortuous. The only reason I understand what it is they’re saying is that I’ve been reading about, and grappling with, MMT for about six or seven months now. I’m not expecting the sumptuous prose of Galbraith or the imaginative lines Keynes is remembered for, just sentences that do not need to be reread twenty times! It took me a month – a month! – to read Wray’s book “Understanding Modern Money”, and still there are questions! Wray may be worthy of countless Nobel prizes, but for some unknown reason he makes the straightforward inexplicably difficult.

As for Mosler, OK, he pretty much singlehandedly created MMT. There is no finer achievement than that, and if there is any justice he will go down as one of the greatest economists of this and the last century. He’s also a tireless proselytiser, and he’s to be commended on that. How many billionaires or near-billionaires spend their time as selflessly as he does? The man doesn’t just deserve a Nobel for economics but one for peace! Unfortunately, none of this distracts from the fact that his insider finance-speak is impossible to understand unless you’re already on board with MMT. His prose is treacle to the power ten. I can now just about make out what he means, but when I first encountered him I remember thinking he might as be talking in Sanskrit. Being right isn’t enough. And it isn’t a question of the supposed difficulty of the subject: Brian Romanchuk, Neil Wilson and you on this blog have shown that this material can be made intelligible. The Austrians may be crackpots and they’re not right about anything, but they certainly know how to get their message across. I say all this as a supporter of MMT! And the first thing supporters should be is honest.

Re your question as to what would happen under a Pos Money system if the Treasury overspent, that problem exists under the present system doesn’t it? E.g. as I understand it, the NHS (at least in some geographical areas) has exceeded it’s budget. I suppose the answer is that heads roll or someone is demoted. I.e. at least Pos Money’s system is no worse than the existing system in that connection.

Re “circulating liquid assets”, I agree there are plenty of those. In fact Warren made the same point when he said that government debt is very close to money. My answer to that is that economists have long recognised that there is no sharp dividing line between money and non-money. However, classifying a particular group of assets as money and keeping an eye on the total stock of that stuff is a useful exercise. Nearly every country does that, and quite right I think. Also, while government debt substitutes for money in the world’s financial centres, and between millionaires, it just isn’t accepted as money for 95% of transactions, e.g. buying a house or car or doing the weekly shopping.

I agree that the basic argument is whether to tweek the existing system (as advocated by Sir John Vickers & Co, Neil Wilson, Warren, etc etc, or whether to go for a root and branch reform, as advocated by Pos Money, Friedman, Cochrane, Lawrence Kotlikoff, etc.

‘Another prime example is Werner’s insistence on crowding out (see his superb book “Princes of the Yen”), which is odd as he is an exponent of endogenous money.’
Is he?

“We conclude that the likeliest assumption concerning the determination of the credit market is that it is supply-determined.” {Following Stiglitz and Weiss: Credit rationing in markets with imperfect information, American Economic Review, vol 71, no 3, pp. 393-410}.
Werner, Richard (2005), New Paradigm in Macroeconomics, Basingstoke: Palgrave Macmillan” P197

@John Adams: Which version of Wray’s primer are you referring to? I’m just finishing reading the 2nd edition (2015) of “Modern Money Theory”, and (speaking as an amateur) I’d say it’s very readable and understandable. Also his “Why Minsky matters” is equally accessible.

Bill Mitchell’s “Eurozone Dystopia” is fairly readable, if a bit meatier than the above two.

(I’m guessing that I might not enjoy the textbook as much though).

W.M. – I thought the 7DIF book was quite readable.

Werner: I think he’s a great communicator, and I agree with you about hoping for some dialogue between him and MMT proponents. My feeling is that fundamentally, he’s on the same “side”; technical differences can surely be ironed out, I would hope.
(I need to check, but I have a feeling you may be doing him a disservice over “crowding out” – doesn’t he just bring that in as a mainstream argument, and then demolish it later? (but I could be wrong…). I like his healthy disrespect for central bank “independence”; in that respect anyway, I’d think he and Bill Mitchell would be kindred spirits.

Alex: “But I thought Mosler’s two books were pretty straightforward and nice to read. I guess it’s subjective.”

It always amazes me when people say that Mosler’s books are the place to start. I read them first and couldn’t make head or tail of the important stuff. Between Werner, Positive Money and Frank Newman’s two books, I finally got what MMT was trying to articulate. Then Brian Romanchuk and Eric Tymoigne did what should have been done so long ago. I’d say that Mosler’s books are only clear after reading others! Indeed, only then can be truly appreciated. It’s only then do you appreciate how phenomenally insightful he is.

If I had to recommend learning MMT, Tymoigne and Romanchuk then Mosler would be a good path. I can only say that I’m in awe of those who learned MMT years ago – Neil, Ralph, yourself, etc – without the help of the works I’ve noted above. I don’t know how you did it. I’ve never needed to be spoon fed before, but in my defence I can say that up until about six months ago I knew almost nothing about economics. It’s a humbling experience!

Only too aware of the difficulties I’ve had, the thing I’m trying to figure out is how to make this stuff easy to swallow for anyone and everyone, not just those who are well read and educated, those with the time and the resources to unlearn all they have learned and then start again, or those who have always had a passionate interest in this stuff. That’s the challenge. After all, most people know very little about economics, money, banking, finance, etc. Admittedly, anything that’s worth learning takes time but we have to make this stuff easily digestible. I sympathised enormously with Bill Mitchell when his talk in London descended into confusion and mutual accusation. But if you looked at it from the eyes of the activists he was talking to, you couldn’t help but be even more sympathetic to their plight. Ah, the neoliberals have done a real number on us!

I was always interested in Post-Keynesian economics, so I was comfortable with endogenous money, etc. by the time I encountered MMT. The operational stuff that Mosler explains is all straightforward once he explains it. But for me learning it made a lot of pieces in the Post-Keynesian picture fall more readily into place (for instance banks not being reserve constrained is built right into the system rather than being a policy choice within the system). And remember that Ch.17 in the General Theory finds the key to whole interest-rate analysis in the fact that the production of money can’t be switched on and off by the productive sector the way that production of other things can.

What really interests me, as I’ve said, is the implicit political philosophy: currency is viewed *in its primary purpose* as a device for provisioning the public sector and not as a medium of exchange supplied to the private sector to use for *its* purposes. That point is partly normative. I think it’s also where the general public might like to begin, since it’s where all the ethical and political issues that interest most people are most prominent. That’s why I think Mosler’s story with the parents and the “chore coupons” in 7DIF is a good starting point. For people who aren’t already interested in macroeconomic theory, I think it’s better than Wray’s primer or his and Bill’s textbook.

I think what blocks understanding isn’t only cognitive. It’s not that the concepts are too difficult or even that people are used to thinking a different way. It’s the nagging feeling that if it really worked like this, mainstream economists would be saying it rather than a small fringe movement. That’s what we need to address, I believe. We also need to sort out the normative claims from the descriptive ones; I don’t think that’s been done as precisely as required.

What is obvious is “money is a tricky abstract” concept that serves the interests of those who best understand it’s true character and possibilities as an instrument of monopoly control over those who have little clue of the known effects of this Black Magic.

Or as one of the Rothschilds put it, “The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

‘In fact bonds are a relic of the gold standard (when an importance difference between them and reserves was that reserves were gold certificates and bonds were not). Today bonds are sold for the purpose of maintaining a higher-than-zero interest rate, but this could just as well be achieved by paying interest on reserves.’

Aren’t bonds also often used as collateral for repo in the shadow banking system? That seems to me to be important part of how the public-private function of the CB works.

It’s structured around the idea that the 0 rate isn’t permanent. If the rate were permanent, there’d have to be some pretty significant changes, not just in shadow banking, but in pension funds, etc. But it’s not about bonds as such. As far as I understand.

I quite agree that NSI pretty much amounts to the safe half of the bank industry advocated by Pos Money. However, NSI doesn’t provide ALL the services that bank customers expect from a traditional bank current account and which Pos Money (I think rightly) would want those customers to have available to them. E.g. NSI doesn’t provide cheque books or debit cards. Also NSI doesn’t have a physical presence on many high streets, and many bank customers want to or have to physically go into a bank branch from time to time (e.g. to deposit physical cash).

Re interest on current / safe accounts, the amount currently paid is derisory, so there wouldn’t be much change there. I get about 0.1% and have to pay a monthly charge of about £12, which is much more than the interest earned.

Having said that, under Milton Friedman’s system, safe money is also put into short term government debt, so under that system depositors would get a little interest (or pay less to have a bank account).

Re negative interest, from the bank customer’s perspective, that comes to much the same as no interest plus a monthly charge, doesn’t it?

Re the “enticing” phraseology used by Pos Money, I agree they go in for that. But they ARE a campaigning organisation, not an academic journal. And I’m all for getting Mr & Mrs Average involved in this debate, so I’m prepared to allow Pos Money to go in for a bit of “populism”.

John Adams,

I quite agree that one reason for the lack of real reform in the bank industry is as you put it the “power and influence of finance”. The finance industry in the UK spends about £90m a year on lobbying according to this source:

Milton Friedman’s explanation as to why his 100% reserve system has not been adopted was much the same. He said “The vested political interests opposing it are too strong, and the citizens who would benefit both as taxpayers and as participants in economic activity are too unaware of its benefits and too disorganised to have any influence.”

Cochrane basically favours the system advocated by Milton Friedman, Positive Money and others. But he goes a bit off the rails in that article, or so I claim in a comment after the article.

I referred Warren to that Cochrane post, and Warren’s reply (in an email) was thus.

“To me it’s all about the blind leading the blind. A bank ‘fails’ only because a regulator says it fails, and in that case the CB provides liquidity to continue day to day operations without business interruption for ‘main st. and the bank president reports directly to the regulators, rather than to the board or the shareholders.

At that point in time it’s become a ‘public bank’ just like the Fed 😉 and the regulators decide what comes next. They can continue to operate as a public bank indefinitely, for example, while they probably are figuring out how to get it back to being a private bank. The easiest way is to sell it all to another bank, which may or may not result in anything left over for the former shareholders, and may even require ‘public funds’ to keep insured depositors whole, depending on the extent of the losses/price of the sale.

If they don’t find a buyer they can then start liquidating by selling the deposits, which generally trade at some premium, funding the rest at the CB. Then they can start selling off the assets- the loans and securities, etc. along with any real estate owned, until it’s all gone. Again, at that point, any funds left over can go to the former shareholders or to the govt. as some kind of liquidation fee, etc. And it the asset sale doesn’t produce enough to repay the CB liquidity provided that’s a loss for the govt. that gets added to the deficit.

That’s it, mate. Not all that much to it, and there is no such thing as ‘too big to fail’ when looked at that way.”

Hi Warren,

I don’t favor any sort of preferential treatment for banks (as compared to other businesses) like allowing regulators (aka taxpayers) to rescue a bank which can’t pay its creditors on the due date. That equals a subsidy of the bank industry.

An FDIC system is better: that pays for itself, thus no subsidy is involved. But even there, I object to the basic risk involved in traditional banking, i.e. “borrow short and lend long” – maturity transformation (MT). All MT does is to create liquidity (aka money). But the state can create whatever amount of money is needed to keep the economy at full employment, as every MMTer knows. So why run the “MT risk”?

The Cochrane / Friedman / Positive Money system avoids that risk. Only the state creates money: private banks don’t. The private bank industry is split in two: one half just accepts deposits which are kept in a totally safe manner. The other half lends to mortgagors, businesses etc, but that half is funded just by equity (or similar). Failure is virtually impossible for either half.

Also regulating that system is very simple: regulators just need to look at the liability side of lending institutions’ balance sheets – there shouldn’t be anything resembling a deposit there.

We’ll have to have another meeting to sort this out. I suggest a selection of Brits fly out to some strange island in the West Indies for a meet-up. We can do some tax-dodging while there. That’ll pay for the flight..:-)

These aims can be achieved without any overhaul of the banking system.

First, tear up all existing banking regulation and fire the regulators. Now neither bailouts nor lender-of-last-resort actions will occur, since there won’t be any regulators to determine they should occur. Depositors will be on their own.

As for banks that take deposits and keep them 100% safe, there are already NS&I certificates, so nothing needs to change there. For some reason Positive Money wants us to pay for safe deposits rather than earning interest on them. That’s also easy to arrange: just set negative interest rates on all NS&I accounts.

This seems like the straightest path to get to the result PM wants. So why don’t they promote that? Because: “Join the campaign to tear up all bank regulation and charge people for saving money” sounds less enticing than: “Join the campaign to stop banks creating money.”

That’s nicely put. As I said in another thread, better codes of conduct could be ensured by strengthening the Post Office (NS&I). It would be able to not only compete with the high street banks but ensure that they don’t get up to the silly bugger stuff that landed them all into so much trouble. The only problem with a strengthened Post Office is that it may well put the high street banks out of business, which may in fact be a good problem to have!

A strengthened Post Office, regulation to ensure that banks do what banks are meant to do and no more (for example a better, more modern version of Glass-Steagall), and supporting an extensive network of not-for-profit local banks and credit unions would get rid of nearly all the shenanigans we currently see. Private commercial banks can exist as long as they are in competition with not-for-profits and the newly empowered praetorian on the street, the Post Office, who nobody in their right minds would want to mess with. A financial authority that actually prosecutes misbehaviour would be a good idea.

As we all know, all this is all very easy to achieve, but the issue is said to be the power and influence of finance. The interesting thing is that this cannot be the whole story. In 2008, the power and influence of finance was zero. They were on their collective knees and without state aid would have gone down the tubes. They were in no position to influence public policy. The vast majority of the financial system could have been at the time nationalised, at no cost to the taxpayer – in fact, it would have been to the taxpayers advantage. The now nationalised financial system could have then been broken up into the kind of system advantageous to the public. However, none of this was down. The question is why? It seems that the overwhelming problem is inside people’s heads – a longstanding MMT complaint. Those in elected office genuinely believe that the parasitic financial system as currently constituted is necessary and advantageous.

As I said in my book, to continue doing business, banks need the state to continually sign off on their activities. They are thus always “on their knees”, and any choice to allow them to continue in their current activities is a political choice, pure and simple.

Warren replied to the email I sent him (see my comment 19th April, 12.25, starting “I don’t favor..”). Plus I replied to his reply. We both inserted comments in the original email. I’ve set out the original email below with my new words prefixed by “Ralph:” and ending in XR. and his by “Warren:” and ending in XW.

Hi Warren,

I don’t favor any sort of preferential treatment for banks (as compared to other businesses) like allowing regulators (aka taxpayers) to rescue a bank which can’t pay its creditors on the due date. That equals a subsidy of the bank industry.

Warren: What does ‘rescue a bank’ mean?
If shareholders lose everything who has been rescued? XW

Ralph: By “rescue”, I meant some of the options you referred to. E.g. turning a loss making private bank into what you called a “public bank” and continuing to “operate it as a public bank indefinitely”. And using public funds to bail out depositors constitutes a “rescue / subsidy”, (though as I said, if that’s done via a self funding FDIC system, that’s not too bad. But FDIC doesn’t cover LARGE banks in the US, does it?) XR

An FDIC system is better: that pays for itself, thus no subsidy is involved.

Warren: Borrowers pay via higher rates. XW.

Ralph: Agreed: and it’s quite right that they should pay. XR

But even there, I object to the basic risk involved in traditional banking, i.e. “borrow short and lend long” – maturity transformation (MT).

Warren: Interest rate risk is not allowed and liquidity guaranteed so what’s the risk apart from default? XW.

Ralph: Liquidity can only be guaranteed (particularly for large banks) thanks to very large dollops of public money. Far as I can see the Fed loaned about $600bn for around 18 months at a derisory rate of interest to those banks in order to save them. That amounts to a subsidy. But quite apart from that subsidy, default of large banks involves serious externalities: i.e. falling aggregate demand, higher unemployment etc. XR.

Ralph: Misunderstading here. I was referring to liquidity for the economy as a whole, not just for banks. I.e. when a bank accepts $X of deposits and lends that on to say a business, the business has $X to play with, plus the original depositors also have (or think they have) the original $X to play with. $X has been turned into $2X. Messers Diamond and Rajan referred to that risky liquidity creation process in the abstract of a paper of theirs (link below). As they put it, “We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these (liquidity creation) functions. ”

Only the state creates money: private banks don’t. The private bank industry is split in two: one half just accepts deposits which are kept in a totally safe manner. The other half lends to mortgagors, businesses etc, but that half is funded just by equity (or similar). Failure is virtually impossible for either half.

Warren: Right, which substantially limits lending and likely raises borrowing rates.
So if you think that serves public purpose fine! It’s an option! XW.

Ralph: I quite agree it limits lending and raises borrowing rates. As to the demand reducing effect of that, that’s no problem at all because the state has an infinite capacity to compensate for that by raising demand – as pointed out very eloquently by Mosler’s law..:-) As to higher rates as such, the only important question there is whether rates are a move towards or away from the free market rate. If that’s a move TOWARDS the free market rate, then I claim that raises GDP. My reasons for thinking that DOES constitute a move towards a free market rate are thus. A lender is normally a person (or firm) which does some work, earns some money and then abstains from spending that money so as to transfer spending power to a borrower. Even if the lender just inherits money from a rich auntie, at least they consciously decide to abstain from spending so as to enable the borrower to spend.

In contrast, some (but not all) of the money loaned by banks is simply produced from thin air. I.e. in effect, private banks can still print and lend out home made £10 notes like they used to in the UK prior to the abolition of private note production 1844. That’s an entirely artificial privilege for money lenders (aka banks). There is no more reason to let banks create / print money than there is let any other type of business do so. That artificial privilege for banks is actually written into UK law (not sure about US law). That is, as Richard Werner has explained, banks are excused the so called “client money” rules.

We’ll have to have another meeting to sort this out. I suggest a selection of Brits fly out to some strange island in the West Indies for a meet-up. We can do some tax-dodging while there. That’ll pay for the flight..:-)

Warren replied to the email I sent him (see my comment 19th April, 12.25, starting “I don’t favor..”). Plus I replied to his reply. We both inserted comments in the original email. I’ve set out the original email below with my new words prefixed by “Ralph:” and ending in XR. and his by “Warren:” and ending in XW.

Hi Warren,

I don’t favor any sort of preferential treatment for banks (as compared to other businesses) like allowing regulators (aka taxpayers) to rescue a bank which can’t pay its creditors on the due date. That equals a subsidy of the bank industry.

Warren: What does ‘rescue a bank’ mean?
If shareholders lose everything who has been rescued? XW

Ralph: By “rescue”, I meant some of the options you referred to. E.g. turning a loss making private bank into what you called a “public bank” and continuing to “operate it as a public bank indefinitely”. And using public funds to bail out depositors constitutes a “rescue / subsidy”, (though as I said, if that’s done via a self funding FDIC system, that’s not too bad. But FDIC doesn’t cover LARGE banks in the US, does it?) XR

An FDIC system is better: that pays for itself, thus no subsidy is involved.

Warren: Borrowers pay via higher rates. XW.

Ralph: Agreed: and it’s quite right that they should pay. XR

But even there, I object to the basic risk involved in traditional banking, i.e. “borrow short and lend long” – maturity transformation (MT).

Warren: Interest rate risk is not allowed and liquidity guaranteed so what’s the risk apart from default? XW.

Ralph: Liquidity can only be guaranteed (particularly for large banks) thanks to very large dollops of public money. Far as I can see the Fed loaned about $600bn for around 18 months at a derisory rate of interest to those banks in order to save them. That amounts to a subsidy. But quite apart from that subsidy, default of large banks involves serious externalities: i.e. falling aggregate demand, higher unemployment etc. XR.

Ralph: Misunderstading here. I was referring to liquidity for the economy as a whole, not just for banks. I.e. when a bank accepts $X of deposits and lends that on to say a business, the business has $X to play with, plus the original depositors also have (or think they have) the original $X to play with. $X has been turned into $2X. Messers Diamond and Rajan referred to that risky liquidity creation process in the abstract of a paper of theirs (link below). As they put it, “We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these (liquidity creation) functions. ”

Only the state creates money: private banks don’t. The private bank industry is split in two: one half just accepts deposits which are kept in a totally safe manner. The other half lends to mortgagors, businesses etc, but that half is funded just by equity (or similar). Failure is virtually impossible for either half.

Warren: Right, which substantially limits lending and likely raises borrowing rates.
So if you think that serves public purpose fine! It’s an option! XW.

Ralph: I quite agree it limits lending and raises borrowing rates. As to the demand reducing effect of that, that’s no problem at all because the state has an infinite capacity to compensate for that by raising demand – as pointed out very eloquently by Mosler’s law..:-) As to higher rates as such, the only important question there is whether rates are a move towards or away from the free market rate. If that’s a move TOWARDS the free market rate, then I claim that raises GDP. My reasons for thinking that DOES constitute a move towards a free market rate are thus. A lender is normally a person (or firm) which does some work, earns some money and then abstains from spending that money so as to transfer spending power to a borrower. Even if the lender just inherits money from a rich auntie, at least they consciously decide to abstain from spending so as to enable the borrower to spend.

In contrast, some (but not all) of the money loaned by banks is simply produced from thin air. I.e. in effect, private banks can still print and lend out home made £10 notes like they used to in the UK prior to the abolition of private note production 1844. That’s an entirely artificial privilege for money lenders (aka banks). There is no more reason to let banks create / print money than there is let any other type of business do so. That artificial privilege for banks is actually written into UK law (not sure about US law). That is, as Richard Werner has explained, banks are excused the so called “client money” rules.

We’ll have to have another meeting to sort this out. I suggest a selection of Brits fly out to some strange island in the West Indies for a meet-up. We can do some tax-dodging while there. That’ll pay for the flight..:-)

“On their knees”? What splendid/disturbing imagery. It raises the question of who they’re unzipping, but it’s fair to say that we already know the answer. With lines like this, I’m sold. I’m buying your book.

I know you’re an expert on Dutch Cartesianism, and therefore rationalism in general too. The following question may seem uncommonly unusual and may be impossible to answer (it may not have ever been asked), but is there a possibility that the reason money has pretty much always had the same history in every culture/society something to do with an innate idea of what money is in the mind? Is seems that its history is more than contingent and is a deep feature of all societies. Or is it a case that the reason credit money is adopted in primitive societies is simply because it is the most obvious and most useful, although even then there may be an indication of its innateness? Can there be more to this than that found in social anthropology, that is it may be an innate feature, or perhaps the two overlap?

‘Only because Treasury bonds have not been included in the definition of money! So this is a fact that follows from a mere definition and can’t have any operational significance. [At this point Warren looked at me to give a helpful philosophical explanation, which I was unable to do. I now propose Collingwood’s phrase: “trying to pull a concrete rabbit out of an abstract hat”.]’
I think H.L.A. Hart’s concept, and critique of, the “definitional stop” is also relevant:
‘The chief importance of listing these sub-standard cases is to prevent the use of what I shall call the “definitional stop” in discussions of punishment. This is an abuse of definition especially tempting when use is made of conditions (ii) and (iii) of the standard case against the utilitarian claim that the practice of punishment is justified by the beneficial consequences resulting from the observance of the laws which it secures. Here the stock ‘retributive’ argument is: If this is the justification of punishment, why not apply it when it pays to do so to those innocent of any crime chosen at random, or to the wife and children of the offender? And here the wrong reply is: That, by definition, would not be “punishment” and it is the justification of punishment which is in issue.6 Not only will this definitional stop fail to satisfy the advocate of ‘Retribution’; it would prevent us from investigating the very thing which modern scepticism most calls in question: namely the rational and moral status of our preference for a system of punishment under which measures painful to individuals are to be taken against them only when they have committed an offence. Why do we prefer this to other forms of social hygiene which we might employ instead to prevent anti-social behaviour and which we do employ in special circumstances sometimes with reluctance? No account of punishment can afford to dismiss this question with a definition.’